Patent counterfeiting in China - will the new Supreme Court guidelines have a positive effect for patent holders?

In an effort to show their commitment to assisting in the clamp down on intellectual property infringements in China, the Supreme People’s Court and the Supreme People’s Procuratorate of China issued new guidelines known as the Interpretation on Several Issues for Handling Criminal Cases of Infringement of Intellectual Property (the “Interpretation”). The Interpretation came into force on 22 December 2004.

The Chinese Criminal Code provides for criminal sanctions for all types of intellectual property infringements, including patent infringements. In particular, Article 216 of the Criminal Law states that:-

Whoever counterfeits other people's patents, and when the circumstances are serious, is to be sentenced to not more than three years of fixed-term imprisonment, criminal detention, and may in addition or exclusively be sentenced to a fine.

However, in practice, many patentees have been critical of the practical effect of the Criminal Code, mainly because there was uncertainty as to the precise criteria for establishing criminal liability and a number of ill-defined terms such as “where serious”, “where especially serious” or “where the amount of unlawful gains is relatively large” contained in the legislation. Coupled with this, it was very difficult to enforce the criminal provisions against an infringer because the administrative authorities, such as the Patent Management Bureau, did not have sufficient cooperation with the Public Security Bureau (the Police) which obstructed the transfer of cases to the PSB for criminal prosecution. As a result, patent owners rarely sought to pursue criminal liability for infringement of their patents.

The Interpretation is intended to deal with these complaints by clarifying the exact thresholds for sentencing and conviction under each of the various existing criminal offences and by providing clearer definitions of some of the ambiguous terms used in the Criminal Code. The Interpretation comes as part of China’s efforts in recent years to crack down on intellectual property infringements in order to comply with its obligations under the terms of its entry into the World Trade Organisation (WTO) in 2001.

Provisions of the interpretation relating to patents

The following is a summary of the main provisions of the Interpretation that affect the rights of patent owners in China:

Article 4

The threshold for criminal liability of an individual involved in the counterfeiting of a patent is set at the following amounts:

(1) counterfeiting a patent where the illegal revenue is more than RMB200,000 or the illegal gain is more than RMB100,000;

(2) causing direct economic loss of more than RMB500,000 to the owner of the patent;

(3) counterfeiting more than two patents where the illegal revenue is more than RMB100,000, or the illegal gain is more than RMB50,000;

(4) other circumstances of a serious nature.

Sub-paragraphs (1)–(3) above help to clarify the meaning of the phrase “the circumstances are serious” in Article 216 of the Criminal Code. However “other circumstances of a serious nature” under sub-paragraph (4) is without further definition, which means that the Article, in effect, solves one problem whilst creating another. The previous guidelines contained specific provisions relating to goods that present a severe health or safety risk, such as car parts or pharmaceuticals, but these have not been included in the guidelines in the Interpretation with no explanation of why they are not included.

The Article also provides that anyone who breaches Article 216 of the Criminal Code shall be sentenced to fixed-term imprisonment of not more than three years and/or a fine.

Article 10

This provision lists a number of specific acts that fall under the definition of “counterfeiting the patent of another person” in Article 216 of the Criminal Code as follows:

(1) Citing the patent number of the commodities or the packing of the commodities one produces or sells without permission of the owner of the patent;

(2) Citing the patent number in advertising or other publicity materials without permission of the owner of the patent so as to make people think that the relevant technology is the patented technology of another person;

(3) Citing the patent number in a contract without permission of the owner of the patent so as to make people think that the relevant technology referred to in the contract is the patented technology of another person;

This Article defines “illegal revenue” as the value of products manufactured, stored, transported and sold by the infringer. Calculation of whether the relevant threshold has been exceeded should be based on the following:

(i) the value of infringing products manufactured will be calculated according to the actual sale price;

(ii) the value of unsold infringing products will be calculated according to the price marked on the goods or the average selling price of the infringing goods;

(iii) if it is not possible to ascertain the price marked on the goods or the actual sale price, the value of the unsold products will be calculated according to the average market price of the genuine products.

Illegal revenue, illegal gains and the amount of sales will be calculated cumulatively in cases of repeat infringements of intellectual property where such acts have not yet been the subject of administrative penalties or have not previously been the subject of criminal procedures.

The Article clarifies the fact that it is not necessary to prove that an infringer actually sold products for the purpose of criminal prosecution. However, a number of problems still remain including, for example, the practical difficulties in proving the actual sale price of the counterfeit goods and the question of whether this basis of calculation of the product prices fairly represents the loss to the patent owner when the price of the infringing goods is usually far lower than the price of the genuine goods.

Article 15

The threshold for criminal liability of a corporate entity that commits acts of intellectual property infringement under the Criminal Law is set at three times the thresholds for sentencing and conviction of private individuals under the Interpretation. This has been reduced from five times the thresholds relating to private individuals under the previous regulations.

Although the reduced threshold is a welcome change in general, some patent owners still believe that the distinction between individuals and enterprises is arbitrary since the same damage is suffered by patentees regardless of who actually commits the crime. It is arguable that the distinction offers a loophole to corporate offenders and the standards of criminal liability for individuals and enterprises should be the same if criminal enforcement measures are to be truly effective.

Article 16

This Article defines the crime of aiding and abetting a crime of patent infringement. If anyone knowingly provides loans, capital, bank account numbers, invoices, certificates, licenses, manufacturing and operational facilities, assistance with transportation and storage or acts as an agent to facilitate import and export facilities, they will be deemed an accomplice in the crime.

The Article does not, however, clarify whether accomplices will be punished in the same way as the main defendant.

Effect of the New Provisions

Deterrent Effect

Under Articles 41-61 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), China has an obligation to implement effective enforcement procedures and provide remedies that have a deterrent effect. Article 61 of TRIPS relates specifically to criminal procedures and provides that “Remedies available shall include imprisonment and/or monetary fines sufficient to provide a deterrent, consistent with the level of penalties applied for crimes of a corresponding gravity”. Although, as mentioned above, criminal sanctions were available under the Criminal Code before the Interpretation was issued, China’s failure to make greater use of criminal prosecution for intellectual property infringement due to thresholds for criminal liability that were considered too high and other practical problems, arguably breached China’s obligations under TRIPS in not providing enough of a deterrent to stop the activities of large scale and repeat intellectual property infringers.

It remains to be seen whether, in practice, the reduced thresholds for criminal liability will have a greater deterrent effect. Although patent owners have the option of initiating private criminal proceedings for patent infringement, not much use has been made of this route in the past because of the difficulty patent owners face in collecting enough evidence themselves. Patent owners have traditionally preferred to request public prosecution through the PSB. However, even after the issuance of the Interpretation, the PSB may not be willing, in practice, to prosecute many complaints of patent infringement or other intellectual property crimes for the reason that they do not consider the harm done to society by such crimes as serious as other kinds of criminal activity.

Where the Interpretation may have assisted patent owners is in giving them indirect access to public prosecution. If a patent owner has difficulty collecting sufficient evidence of patent infringement, an effective way of obtaining a prosecution may be to first lodge a complaint with the administrative authorities, the Patent Management Bureaux (PMB). Under an administrative action, it is easy to determine whether the infringers’ acts exceed the relevant threshold as set out in the Interpretation and to collect relevant evidence. If the infringing acts are proven to reach the relevant threshold, the PMB will (in theory) transfer the entire case to the PSB in accordance with the Administrative Penalty Law of the PRC and the PSB will accept the case for further investigation.

The Threshold System

Although some have hailed the Interpretation as providing effective enforcement measures against patent infringers in China, others are doubtful that the new guidelines are much of an improvement on the previous system.

China is the only one of a small number of countries that imposes thresholds for criminal liability for counterfeiting. It is arguable that the use of thresholds for controlling access to criminal enforcement is contrary to Article 61 of TRIPS which requires any counterfeiting or piracy on a “commercial scale” to be subject to criminal penalties. It is difficult to see how, for example, RMB199,000 worth of counterfeit goods, falling just below the relevant threshold for patent infringement, is not an act of counterfeiting on a “commercial scale” whereas RMB200,001 worth of counterfeit goods would constitute counterfeiting on a “commercial scale”. It could be argued that the Interpretation helps to solve the practical problem of where to draw the line as to when the PSB should investigate individual cases of patent infringement. Not all cases can be accepted since government resources are limited in terms of finance and manpower. However, some patent owners are of the view that every case of counterfeiting, on whatever scale, should be eligible for criminal prosecution. The damaging effects of counterfeiting are relative, and in some cases, small local businesses may suffer as much from small-scale infringing activities as multinational companies suffer from counterfeiting on a slightly larger scale. Furthermore, the use of thresholds may create loopholes for counterfeiters, leading them to believe that infringing activities on a small scale will be overlooked and encouraging them to avoid being caught with the requisite amount of counterfeit goods or related documentation. The practical effect of the threshold is that well organised counterfeiters ship the infringing products before the threshold is reached with the effect that there are the same number of infringing articles being manufactured but through a larger number of smaller shipments. This makes the gathering of evidence to prove that the relevant threshold has been met a difficult and costly task.

Another recent complaint of patent holders is that in practice, the seized goods are rarely valued at the correct price. Articles 12 (1) and 12 (2) provide that the seized goods will be valued at the manufacture price or the sale price. However, there is still a huge disparity between the manufacture or sale price of a counterfeiter and the manufacture or sale price of the patent holder. In practice, it is very difficult to convince the PSB that the value of the seized product meets the threshold to justify a criminal prosecution. Therefore, there are proposals by a number of patent holders for the removal of the threshold amounts altogether.

China’s efforts to curb counterfeiting

In November 2005 the Ministry of Public Security (MPS) launched “Operation Mountain Hawk” which is a one-year campaign aimed at more effectively co-ordinating the efforts of local police to accept, investigate and report on the results of intellectual property enforcement work. As part of a campaign specifically targeted at violations of trade mark rights, dubbed “Operation Eagle”, China has arrested 419 people on suspicion of trade mark infringement crimes in the last five months. A court in Shanghai recently sentenced two US citizens to jail terms of up to two years and six months in prison for selling pirated DVDs online. The success of these efforts to crackdown on trade mark infringement and piracy may lead to a similar campaign in China specifically directed at counterfeiting of patents.

The Interpretation has been seen by many patent owners as a step in the right direction towards responding to such international pressure by facilitating the punishment and deterrence of crimes of patent infringement and other intellectual property crimes. However, unlike other types of intellectual property infringements, such as trade marks and unfair competition, it has always been necessary to rely on the administrative or criminal route in enforcing patents because of the technical nature of the patent rights themselves. It will be necessary to monitor whether this will change in due course.